What Is an Envelope Budget and Is It a Good Idea?

Go easy on yourself. Budgeting is hard. But if you can find a method that works for you, it’s a good reality check on your spending habits. Case in point: The envelope budget, which is getting a ton of buzz as a down-and-dirty way to financial plan. But is it really the best system for tracking your cash? Here, we’ll break down the pros and cons.

First, what the heck is an envelope budget? In a nutshell, it’s an envelope system (literally) for keeping tabs on your spending. The idea is that after you get paid, you hit up the ATM and divvy up your cash into envelopes labeled to cover different categories of your budget (rent, groceries, entertainment, etc.).

So, say you determine that you spend $500 a month on groceries. You would count out that exact amount and put it in an envelope labeled “groceries.” Then, when the cash runs out in that envelope, that’s it for the month in that category.

Whoa, cutthroat. But does this system really work? The main pro of the envelope system is this: There’s no way to accidentally go over your budget. When the cash runs out, the cash runs out. Better yet, you don’t have to nickel and dime yourself—a peek inside an envelope will tell you exactly where you stand in any category, so you know at a glance: The restaurant budget is tapped, so no more eating out this month.

But isn’t it tough to always pay with cash? That’s the biggest con of this method. You have to be pretty calculated about your day and always carry cash from your envelopes for any expenses you might incur. You’re also banking on the fact that nothing changes over the course of the month. Counting out your cash—without the option to overspend—puts you in between a rock and a hard place should costs fluctuate or something unexpected comes up. If you can budget in an app with a monthly fee that can digitize the process for you, something like Mvelopes might be your solution.

The bottom line: The envelope system is a good (albeit harsh) reality check on spending. But if you don’t pad your cash-only budget—and carry a money belt—you could find yourself in a financial jam.